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James Pethokoukis is a columnist and blogger at the American Enterprise Institute. Previously, he was the Washington columnist for Reuters Breakingviews, the opinion and commentary wing of Thomson Reuters.

2 charts that show the GOP is all wrong about Bernanke

During Ben Bernanke’s Senate testimony this morning, Republicans again lambasted the Fed chairman for worrying too little about the inflationary potential of his low interest rate/quantitative easing monetary policy. From the WSJ:

A testy exchange between Sen. Bob Corker (R-Tenn) and Bernanke. Corker says Bernanke has sparked a global currency war and created “faux” wealth. Bernanke says he’s not engaged in a currency war or targeting the currency. Corker says Bernanke is the biggest monetary ‘dove’ since World War II, proud of it and degrading society. Bernanke shoots back that he’s got the best inflation track record among Fed chairman since World War II. Corker says Bernanke is punishing savers with his low interest rate policies and throwing seniors under the bus. Bernanke says he’s looking out for long-term unemployed and that the stronger recovery he seeks will help savers. Following Corker’s advice, he adds, would throw the economy back into recession.

This chart of various inflation measures sure doesn’t make Bernanke look too dovish:

Indeed, JPMorgan notes that Bernanke’s preferred PCE inflation measure has averaged 1.99% since he became chairman. Oh, and the Federal Reserve Bank of Cleveland reports that its latest estimate of 10-year expected inflation is a skimpy 1.53%. Inflation is always and everywhere a monetary phenomenon — but not everywhere and always a big problem.

What the GOP should be hammering Bernanke about is the poor growth performance of the economy as measured by nominal GDP as the next chart shows:

Slow NGDP growth contributes to higher unemployment — the jobless rate is currently close to 8% — and makes it harder for borrowers to service their debts. Yet Republicans are pushing legislation to tighten the Fed’s dual unemployment-inflation to put more emphasis on price stability. That seems completely off point and wrong-headed in the current macroeconomic environment.

Discussion: (17 comments)

Simple, basic common sense tells us that continuously printing money out of thin air will, sooner or later, lead to inflation. Banks are now keeping some of what’s being printed out of circulation and keeping the measured inflation down. Countries holding US dollars are getting nervous about how we keep printing money and some are working to replace the dollar as the world’s reserve currency. Creating money the way the Federal Reserve does, is simply stealing from everyone who holds dollars and is dishonest and immoral.

Simple, basic common sense tells us that continuously printing money out of thin air will, sooner or later, lead to inflation.

It has. But by diverting the new money to the purchase of treasuries and creating the biggest bubble in history the supporters of Ben are missing the picture. I guess that they need gold at $5,000 to finally see the light. Sadly, it may be far too late by then.

Two points, Mr. Pethokoukis: First, you must be defining inflation as positive changes in price indices, rather than growth in money supply, particularly growth in credit. The distinction is between symptom and cause. Second, given your definition, the true measure is price index versus what the price index would be without Fed intervention. If prices would have been dropping at 2% or 3% annually (as they ought to be doing in a severe recession) then a 2% increase really indicates a 5% inflation! (This failure to consider the spread between unmolested prices and pumped up prices is widely thought to have misled the Fed in the late 1920s into thinking more easing was required.)

I agree. Mr. Pethokoukis would characterise the 1920s as a period of low inflation even though productivity improvements should have caused prices to drop sharply as they should have. The Fed’s credit creation was masked by those improvements and few saw the problem until the credit bubble collapsed and the malinvestments had to be liquidated. The trouble today is that every pullback has been offset by more and more money printing and the bubbles have gotten bigger and bigger. The housing bubble is much bigger than the tech bubble that preceded it and the current treasury bubble is the biggest of all.

The Fed is getting results? Fiat money and the Fed are self-destructing, nowhere to hide, reality is closing in …

The Fed wanted to prop up the bond market and keep rates low. It did that. Now, as you put it, reality is closing in and it will have to live with the consequences. What gets to me is that economics professors like Mark don’t see the problem and keep telling their readers that everything is fabulous. That must make you question the value of economics degrees from most institutions.

The digital age empowers people, beckons commerce like never before, the lack of a standard of value grows ever more conspicuous, the fictions that support fiat money and central banks are evaporating. A money economy is always a big improvement.

Bernanke has tripled the money supply — the very definition of inflation. Rising prices are not actually how inflation is defined; the government has simply suggested this is the case so as to divert attention from its debasement of the dollar. Having said that, prices of goods that Americans actually buy ARE increasing — upward of 8-10 percent per annum. Peter Schiff’s video here does a good job explaining: http://www.youtube.com/watch?v=pwI3Nya5L9g

I don’t know why Jim P. keeps using these BLS charts as if they haven’t already been debunked a thousand times.

Jim P uses them because he is in favour of central planning, just like the left that he attacks. The disagreement is not about the folly of a top down system but about who should run it. Which is why many voters are leaving both the GOP and Democratic Party.

All in vain, money comes before prices, government controls nothing about the dollar but what it is, price-controls are impossible, as long as it’s a fiat dollar it won’t stop losing value. The nation needs a gold dollar and a money economy, not a price-haggling and counterfeiting operation.

The reason the Fed, Obama, and Republicans can’t stimulate the economy is because we have basically a consumer economy dominated by the service sector (and financial services). 2008 gave us a chance to transform the economy — get more manufacturing back into play (get it up to 25% of the GDP) — and our leadership failed. We remain status quo.

Hey, a meeting of the Cross of Gold Society…. I know you’re impervious to facts, but nonetheless…. The Fed began its printing press run, to the tune of $1.25T if memory serves, to buy Fannie and Freddie paper when no one less would touch the stuff (and understandably so.) So if you believe, as I do, that a first-world economy needs a functioning housing market then you owe a debt of thanks to your friendly neighborhood central bankers.

The Fed’s work since 2009 is more of a mixed bag. The governors, and particularly Dallas Fed chief Richard Fisher, have suggested that it would nice to get some help from Congress. But that would oblige supplysiders to admit that John Maynard is right in some conditions, or alternatively, that Uncle Milton is not all-purpose. We can say that the Fed’s continuing support of the MBS market at least addresses the fundamental problem in the economy by keeping mortgage rates low. The other half, designed to make it very, very easy for banks to lend, is pretty much a bust. We are in Kondratrieff territory, you see, the best explanation of which is that a generation of mortgage lenders and homeowners must die off before houses are mistaken as ATMs once again. And the guideon is not the US in the 1920s but Japan in 1995. The BofJ let deflation psychology set in, and GDP in Japan is still bumping along the bottom 18 years later. That said, I also wonder if the Fed has the skills to withdraw. Climbing on the tiger is easier than getting off. Unless the tiger is too weak and feeble to notice, which remains a distinct possibility.

I can only surmise that you have a very distorted definition of what a “functioning housing market” is. By logical extension, a marionette must meet your definition of a functioning human being so long as the puppeteer is present. And apparently congress pumping up spending from an average of around 20% of GDP over the decade prior to an average of closer to 24% of GDP post 2008 to present and its abject failure combined with the Fed’s off the charts Keynesian experiment in currency debasement simply isn’t enough to convince Mr. Fisher and others similarly impervious to facts of John Maynard’s sophistry. It never is. The excuse has always been and will always be that it was a failure in scope rather than misguided theory.